Chengdu Kanghong Pharmaceutical Group Co., Ltd's (SZSE:002773) Price Is Right But Growth Is Lacking After Shares Rocket 40%

Chengdu Kanghong Pharmaceutical Group Co., Ltd (SZSE:002773) shareholders have had their patience rewarded with a 40% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

Even after such a large jump in price, Chengdu Kanghong Pharmaceutical Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.1x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 62x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Chengdu Kanghong Pharmaceutical Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Chengdu Kanghong Pharmaceutical Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chengdu Kanghong Pharmaceutical Group.

How Is Chengdu Kanghong Pharmaceutical Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Chengdu Kanghong Pharmaceutical Group's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the sole analyst following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why Chengdu Kanghong Pharmaceutical Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Chengdu Kanghong Pharmaceutical Group's P/E?

Despite Chengdu Kanghong Pharmaceutical Group's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Chengdu Kanghong Pharmaceutical Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Chengdu Kanghong Pharmaceutical Group, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.